What most parents get wrong about saving for their kids’ college education

3 surprising things most parents don’t know about planning for their kids’ college education.

Many parents begin thinking about how to pay for their child’s college from day one, but the best-laid plans can still be wrong. Consider these 3 surprising lessons from experts in financial planning.(Photo: Steve Debenport, Getty Images/iStockphoto)

If you have kids or even if you just dream about having them one day, you’ve likely thought about saving for their college education. As a four-year degree has become nearly de rigueur in this country, most parents plot, plan and oftentimes panic about how to finance those degrees before even changing a diaper.

James Lenhoff, president of Wealthquest, a Cincinnati-based financial planning and wealth management firm, says most parents have misperceptions about saving for college that can end up costing them and their children in the long run. Here are the three biggest mistakes parents make when it comes to financing their kids’ higher education, and what you need to know to save most effectively.

1. Putting kids first

Hands down, the biggest mistake parents make when it comes to college savings is not putting themselves first, Lenhoff says. We naturally want the best for our kids and will do anything for them, but saving for our kids’ future while neglecting saving for our own isn’t beneficial to anyone.

“I joke with parents all the time that you can certainly save everything you’ve got to send your kid to college, but as soon as they graduate, you’re moving into their basement,” he says.

Think about it this way. Say you sat your kids down and gave them two choices: A) Your mom and I are in good shape and we’re going to be fine, but you might need to get some student loans or B) You get to go to college for free but your mom and I are going to be a giant financial burden to you. Of course, kids would choose option A every time, but parents chose option B all too often because they want so badly to give them everything. All those nurturing feelings can result in irresponsible financial moves, though.

Lenhoff says he frequently sees couples with tens of thousands of dollars in a 529 plan for their kids with little to nothing in their own 401K. That’s backward, he says. Parents must take care of their financial needs first, or everyone will pay for it in the future.

Caption: It’s impossible to predict the future — including college costs — so planning for your child’s educational expenses should be more about working towards a loose goal rather than a fixed number. (Photo: Getty Images)

It’s impossible to predict the future — including college costs — so planning for your child’s educational expenses should be more about working towards a loose goal rather than a fixed number.(Photo: monkeybusinessimages, Getty Images/iStockphoto)

2. Saving too much

Yes, you read that correctly. While most parents worry they’ll never save nearly enough, the fact is plenty of them may actually be saving too much money for their kids’ college.

Lenhoff cautions parents that projected college costs are a guess at best, and we really have no idea just how much a four-year degree will cost in 10 or 15 years. Also, your kids’ best educational path may not end up being a traditional four-year school.

“The end game is so hard to predict,” Lenhoff says. “The biggest tip I give to parents is to hold the college goal loosely.”

He says parents also need to think about their philosophy when it comes to college savings. Most people fall into one of three camps:

Those who believe their children should pay for their own education

Those who want to pay for every penny of their kids’ education

Those who will fund part of their kids’ college education, but want their kids to (and/or need them to) have some skin in the game and pay for the rest

Identifying which camp you fall into can help you better plan your savings goals, and in many cases, make the process feel less overwhelming.

3. Single-strategy savings

Most parents turn to 529 plans when they start saving for college, and for good reason. These plans are entirely tax sheltered if the funds are used for education expenses. The key word here, however, is “if.”

What if your child decides not to pursue a four-year degree, or they get financial aid and scholarships? Overfunding your child’s college savings can result in some major financial setbacks as you have to pay taxes plus a 10% penalty on any investment gains, if you withdraw the money from a 529 plan for any other purposes. The IRS does allow a few exceptions to the 10% penalty rule when taking distributions from a 529 that match a scholarship received, but it could still generate a tax bill.

“The 529 plans are awesome for when you use them, but they’re ticking tax-time bombs if you don’t,” Lenhoff says.

So, what’s the alternative? Lenhoff says the best route to successfully save for your children’s future is to map out your priorities with a trusted financial advisor. Once you have checked the boxes to secure your own financial goals, then you can look at how extra funds may be used to help your children. That may end up being a mix of a 529 plan along with other more flexible accounts.

Wealthquest offers these services and more under one roof, for one simple fee. Unlike robo-investment services and online calculators that spit out formulaic advice, Wealthquest’s advisors look at things from both a tax perspective and an investment perspective at the same time to maximize the power of your money and protect you from penalties. They can also help you manage and adjust your plan when life throws those curve balls that it so often does.

Saving for your children’s college education doesn’t have to be a panic-filled pursuit that leaves you pinching every penny. Setting your priorities and working with experienced professionals can help you plan and make the most effective use of your funds to benefit your entire family. For more information on planning for your family’s financial future, contact Wealthquest.

Members of the editorial and news staff of the USA Today Network were not involved in the creation of this content.